Columbus McKinnon Corporation Fiscal 2012 Third Quarter Teleconference and Webcast January 27, 2012

Transcription

1 Operator: Welcome and thank you for standing by. At this time, all lines are in a listen-only mode. During the question-and-answer session you may press star 1 to ask a question. Today's conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the meeting over to your host, Mr. Tim Tevens. Tim Tevens: Thank you, Sherry and good morning, everyone. Welcome to the Columbus McKinnon conference call to review our results for the fiscal 2012 third quarter. With me here today is Greg Rustowicz, our Vice President for Finance and CFO. Please take note that we have once again included some third quarter summary slides for your review. They can be found at our Web site at Hopefully, they will be helpful to you as we walk through some of our scripted materials today, and if need be, we can certainly reference those slides, as well. We do want to remind you that the press release and accompanying slides in this conference call may contain some forward-looking statements within the meaning of the Private Litigation Reform Act of These statements contain known and unknown risks and other factors that could cause the actual results to vary. You should in fact read the periodic reports that Columbus McKinnon files with the SEC to be sure you understand these risks. If you have the slides in front of you, please go to slide 3 and let me make a couple of comments on that slide. Revenue growth continued a nice positive trend, up 10.9% in the quarter. The United States is beginning to gain some momentum, whereas Europe is still growing, but just at a slower pace. China and Latin America are small and growing more rapidly for us. Our bookings in the quarter also continued which is a very nice positive trend, and are up double digit range over last year. Our backlog is up to $110 million, about $31 million over last year, and sales outside the United States are now at about 48% of our total revenue. We continue to see increasing global economic activity. In December, United States industrial capacity utilization was 76.4%, while the Eurozone industrialization capacity decreased slightly, but is still around the 80% area, which is fairly positive. As you may know, our bookings, and normally our revenues, track the industrial utilization figures, and if the utilization rates increase, so does our revenue. Based upon discussions that we have had with our channel partners and end users alike, we believe that the industrial economies that we serve remain pointed in a very positive direction. Many times we are asked if we re seeing some signs of a looming recession, and at this point we are not. Our biggest issue does indeed remain keeping up with this demand. Slide 4 - our operating profit increased almost 307% to $12 million. Operating margin, excluding the gain on the sale of a facility in Iowa, is 7.4%, and the operating leverage is 54% for the quarter, which is a fairly robust number. With this strong operating leverage in the quarter, we now expect the operating leverage to range between 30% and 40% for the entire year. Our long-term goal remains to achieve a 12% to 14% operating margin once our revenue fully recovers and our forging business is completely on track. 1

2 The earnings per share for the quarter were $0.44, and if you exclude a couple of extraordinary items that Greg will review with you momentarily, that number would be $0.33. We had very nice cash flows from operations in the quarter at $9 million and $13.5 million year-to-date. Our cumulative savings on our consolidations were about $6.4 million, with our hoist and chain consolidations exceeding our expectations at $13 million. Our savings for the quarter is about $1.2 million and our forging business has improved very nicely, to the point where it contributed $1.9 million to gross profit this quarter. We are not yet at the full benefit, but we certainly have improved dramatically, to the point where we're now contributing to profits, which is a positive sign. Let me turn it over to Greg now and he will move us through more details on the results of the quarter. Greg Rustowicz: Thank you, Tim, and good morning, everyone. I'm pleased to have the opportunity to review with you the financial highlights of Columbus McKinnon's Fiscal 2012 Third Quarter that ended on December 31, Turning to slide 5, consolidated sales were $142.8 million, up 10.9% over the prior year period. We continue to see solid volume growth, with overall volume growth at 7.8%. For the quarter, U.S. volume was up 10.5% and non-u.s. volume was up 4.8% over the prior year, despite one less shipping day. Pricing added an additional 2.8% to revenue and foreign currency translation had a 0.4% favorable impact this quarter. We typically have our strongest sales performance in our fiscal fourth quarter and the weakest in our fiscal third quarter. We only have seven more shipping days in the upcoming quarter. A table showing the number of shipping days in each of the quarters of fiscal 2012 and fiscal 2011 is included at the end of the earnings release. Moving to slide 6, our third quarter consolidated gross profit dollars increased by 31.5% and our gross profit margin improved 420 basis points to 27%. Our gross profit benefited by $5.8 million from the increased sales volume previously mentioned. Our forging operations positively impacted gross profit by $1.9 million, or 133 basis points, in addition, we experienced lower product liability costs this quarter, which favorably impacted gross margin by $1.3 million. On a sequential basis, we expect continued improvement in our forging profitability, but expect lower year-over-year improvement as the prior year fourth quarter had higher sales in this segment than we are currently anticipating. Turning to slide 7, consolidated selling expense modestly increased from the prior year in dollar terms and decreased to 11.2% of sales this year compared with 12.1% last year. The increase in selling costs is primarily related to the overall increase in sales. Currency translation was insignificant this quarter. Consolidated G&A expense increased $1.3 million compared with the prior year, representing 8.1% of sales versus 8% in the prior year. The increases are related to our investments in Asia and Latin America and higher variable compensation expense. 2

3 On slide 8, operating income increased by $9 million to 8.4% of sales compared with 2.3% of sales in the previous year. Included in operating income was the gain on the sale of a previously closed facility that Tim mentioned earlier. Excluding this one-time gain, operating margin was 7.4% and operating leverage in the quarter was 54%. This improvement in operating income was driven by the sales volume increase as previously discussed, as well as the benefits of our hoist consolidation. In addition, operating income benefited by $1.9 million from improved performance of our forging operations when compared to the prior year. As you can see on slide 9, income per diluted share for the third quarter fiscal 2012 was $0.44, reflecting a $2.52 increase from the prior year period, where we had a loss of $2.08 per share. Positively impacting the third quarter was the previously mentioned gain on the sale of a closed facility, as well an $850,000 gain on the remeasurement of an investment related to our recent South African acquisition. Excluding these unusual items, diluted earnings per share would have been $0.33 per share. The third quarter fiscal 2011 included a non-cash tax provision of $2.08 per share, which was related to a full valuation allowance against our deferred tax assets. The effective tax rate in the quarter was 16.4% and, year-to-date, it was 25.1%. Our expected effective tax rate for fiscal 2012 has been reduced to 20-25%, resulting from the geographic mix of earnings that we anticipate. On slide 10, we have compared our year-to-date performance for several key metrics. Year-todate revenue is up 13.8%, largely driven by volume and price increases as well as favorable currency translations. Year-to-date operating income is up 239% which includes the gain on the sale of the closed facility as well as the pension curtailment cost that was incurred in our fiscal first quarter. Year-to-date earnings per share are $0.92 versus a loss of $2.02 cents in the previous year. On slide 11, you can see we generated $13.5 million of cash provided by operating activity through the first nine months of the fiscal year. Capital expenditures were $10.5 million for the first nine months of fiscal 2012 versus $8.9 million in the previous year period. This increase is being driven by our global ERP system implementation, where we have spent $4.7 million yearto-date on this project. We expect capital expenditures for fiscal 2012 to be in the $13 million to $15 million range. Finally, on slide 12, you can see that as of December 31, 2011, debt net of cash was $72 million. In total growth, debt was $154 million. Net debt to total capital was 28.9%, which is in line with our 30% debt-to-total-capital ratio goal. In addition to having $82 million of cash in our balance sheet as of December 31, we have an additional $70 million available under our $85 million senior's credit facility, net of $15 million of outstanding letters of credit. With our new subordinated notes in place and with nothing drawn against our revolver, we continue to demonstrate significant liquidity to support our strategic growth plan which includes strategic acquisitions in emerging markets. With that, I will turn it back over to Tim. 3

4 Tim Tevens: Thanks Greg. Okay, Sherry, let's open it up to questions. Operator: Thank you. We will now begin the question-and-answer session. To ask your question, press star, 1. The system will prompt to record your name and company name. To withdraw your request, press star, 2. Once again, to ask your question press star, 1. One moment, please. Our first question comes from Jason Ursaner from CJS Securities. Tim Tevens: Hi, Jason. Jason Ursaner: Hi, Greg. Greg Rustowicz: Hi, Jason. Jason Ursaner: On the forging first. The $1.9 million year-over-year improvement in the quarter, how much is that still down relative to fiscal year 2011? Greg Rustowicz: We are actually positive now. If you remember, for the first quarter we reported a $900,000 negative and in the second quarter we reported a $400,000 negative. With this $1.9 million, if my math's right, I believe we're $600,000 ahead through the first nine months. Jason Ursaner: And last year it was still $7 million down from fiscal year '10? Greg Rustowicz: That's correct. I want to say it was about $6.7 million. Jason Ursaner: Generally, what's the revenue base on that business? Greg Rustowicz: It's about 8% of our sales. Jason Ursaner: Tim, you mentioned the U.S. gaining momentum. Are you actually continuing to see bookings accelerate there with utilization picking up? Tim Tevens: Yes, it's fairly robust right now. As you know Jason, we felt like the U.S. was lagging. A year ago this conversation was where is the recovery? It seemed to be slow, especially after a very deep recession, but now it seems to be gaining momentum in a variety of areas. As we look at the markets, general manufacturing, heavy OEM equipment, mining and our entertainment businesses, they continue to be up dramatically. So right now the bookings momentum seems to be accelerating in the U.S. Jason Ursaner: Still in the double-digit range? Tim Tevens: That's right. Jason Ursaner: You mentioned the slower pace in Europe. Is it the Euro that's impacting it or are you seeing volume come in at a slower pace? Tim Tevens: Volume is at a slower pace. It s more like mid-single-digit growth, as opposed to double-digit growth, which we ve seen there for many, many, months. It is indeed slowing. 4

5 Jason Ursaner: In the emerging markets, are you seeing strength there as well? How do you break down whether the overall market is still strong or whether some of these investments might be offsetting a cooling pace there? Tim Tevens: You probably can guess, given the relatively modest position we have in those markets, it's really difficult for us to get our arms around it, especially with the incredibly limited reporting in our industry in those regions. Is it just economic gain or is it truly market share gain? It's really impossible for me to give you anything other than color and it feels like it's both right now because the numbers are just so small. Jason Ursaner: It's not the time, I think it s a little bit more. Can you talk about the acquisition strategy and what you're seeing out there? How are things going for you? Tim Tevens: You've probably read that we did acquire a very small business in South Africa that serviced the mines down there. This was actually a partner of ours that we had invested in ten years ago. Greg Rustowicz: in 1997 Tim Tevens: Basically, the agent that sold our hoisting products and then serviced them in the mines had seven or eight mines down there that we had great relationships with. The service was a big aspect of these mines. They really expected you to be on site and make the equipment work. The business flourished in this time period. We owned 20% of it from day 1 while our partner there had 80%. He wanted to retire and move on, so we just bought out his 80%. That is a good example of a relatively small, bolt on acquisition that makes a lot of sense for us. It supported our strategy in terms of servicing a very important sector for us, which in this case are the mines. There is other activity that we're in the midst of around the world, although we have nothing to report just yet other than to say that there is a significant amount of interest in our part, as well as with potential partners. While it may be bigger than the South African deal, this one is still modest in size at this point in time. Jason Ursaner: Okay, great. Congratulations on a good quarter. Tim Tevens: Thank you. Operator: Our next question comes from Sean Williams at BB&T. Sean Williams: Good morning. Tim Tevens: Good morning, Sean. Sean Williams: First, I have a housekeeping question. It looks like there was one less day this quarter versus last year. I'm assuming that was about a 160-basis-point drag on the year-overyear growth. Is that right? Greg Rustowicz: I want to say it was $2.1 million roughly, for the one less day. 5

6 Sean Williams: Does that mean that the volume number, the 7.8%, that you called out in the press release really needs to be adjusted higher? Greg Rustowicz: Yes, what we did was, for internal purposes, track it the way you do, but for external reporting purposes we've lumped that one less shipping day into the volume number. Sean Williams: Okay. Can you call out the U.S. volumes versus international volumes again? Greg Rustowicz: I want to say the U.S. volume was up at 10.5% and the non-u.s. volume was up 4.8%. Sean Williams: Any color, either Europe-specific or just kind of international volume, how they progressed through quarter? Were you seeing deceleration throughout the quarter or was it lumpy? Any color you could add there will be helpful. Greg Rustowicz: It's growing. I don't recall anything unique about lumpiness or anything out of the ordinary that we saw come through. In the U.S. in particular, given our strong position, the economic activity is really leading that. We did launch a new product, a brand new Lodestar this past quarter, but basically, that's replacing a 50-year-old design unit. There was some acceleration around that, but that was actually the prior quarter when we launched in the entertainment world, and Europe really seemed to take off on that product line. Sean Williams: Can you talk about the new Lodestar introduction and its acceptance in general? Is that accelerating pricing, because it looked like pricing actually picked up nicely here in the quarter? I wouldn't have expected pricing to really accelerate until maybe more in the spring. Normally, you are doing increases in February or March if I'm recalling correctly. Can you just talk about Lodestar, any effect on pricing and what you see coming over the next quarter or two? Greg Rustowicz: We've always averaged in the 1% to 2% range, so you're right. The 2.8% does seem a little bit high, although last quarter it was at 2.5%. As you know, it's kind of a rolling thing, so we implement price changes in the spring. You get that full effect throughout the year, sometimes with different contracts and agreements that take a little while to get it, but eventually, over time, we do get it. I think this is nothing more than our normal price increase, which has averaged around the world somewhere between 2% and 3%, and we seem to be having most of it come through in our volume numbers here. If you think about us over a cycle, it probably averages between 1% and 2%. Sean Williams: As we move into fiscal Q4 and fiscal Q1, there's no reason why that should accelerate there, right? Greg Rustowicz: It should be in that 2% area. That's right. Sean Williams: On forging, did I hear that you expect the year-over-year gain to actually be lower in Q4 versus Q3? Is that just because of some lower volume activity? 6

7 Greg Rustowicz: We expect sequential quarter over quarter performance, so our Q4 in forging is going to be better than our Q3 in forging. It's just that when you compare it to the prior year's quarters, we had an extremely strong sales quarter in the forging segment. Don't ask me why, but it was very, very strong. As a result, we're going to put up less of a year-over-year improvement than what we showed in the third quarter. Tim Tevens: What we did last year fourth quarter, Sean, just to give you a little color around that, is we really accelerated our production in the quarter to get some of the backlog out of the way. You may recall, we talked about backlog being our primary problem a year ago. It's not today, by the way, but a year ago it was and we really accelerated production to get as much backlog out of the way as possible to service our customers. That's what created a large fourth quarter last year in terms of revenue. Sean Williams: Help me to think about it in terms of the delta, next fiscal year versus fiscal If we're slightly ahead of break even year-to-date and we'll get a little bit more in Q4, should we be talking about $5 million year-over-year as we move into next fiscal year, and $10 million year-over-year, assuming that volumes hold or pick up from this level? Tim Tevens: It's difficult for us to give you specific color around this, because that's not what we do. We don't give guidance in this area, but let's just talk about the forging business and maybe the color will help you get some area of relief in your mind. We have been showing improvement and it has been a very solid trend line over the last couple of years. As you know, we had a mess and we're working our way out of the mess to the point now where it is a positive contributor. We've always said this is a very solid business and one that should produce decent margins, around the company average margins going forward. Right now, it's nowhere near that, but it's certainly working its way toward it. We should get that margin back sometime next fiscal year, if our trend line continues. If you think about what we lost year-over-year in fiscal 2011, it was $6.8 million. In our first quarter fiscal 2012, we lost $0.9 million and second quarter was $0.4 million negative. The third quarter is now $1.9 million. We would expect to see that continue to trend in a positive way. Put the fourth quarter aside for a moment and let s just talk about the extra volume that we had last year. We still should be making more money, and we will be making more money, pushing our way towards the corporate average through fiscal Sean Williams: Thank you. That was very helpful. Just one last question, can you give us an update on where we are with the ERP rollout? Tim Tevens: Thanks for asking that question Sean, because I actually forgot to cover that. We started our global ERP implementation about a year ago now, and we selected SAP to go to our facilities. We put together a global implementation plan and our first site was due to go live this past November I m happy to say that we did go live, effective December 1, on the global ERP system that we designed and are putting in place at our Duff Norton facility. The reason we took this approach is because Duff Norton is a relatively modest sized, small business. It's about $30 million in revenue and we could easily get our arms around it and use it as a training ground for our people to help roll this out globally now. 7

8 We had success, certainly not without a bump in the road here or there and not without issues that we had to wrestle to the ground, but I'm pleased to say that our team did a great job of executing. It's running and the business is actually back up, with a better run rate than what it normally would do. That's good news. Now, we're out at the second location, which most likely will be a location in Europe, and that will be coming online sometime next summer. So we re well under way, with a lot of learning going on, and we feel good about the position we're in, in terms of getting that going. Over the next couple of years or so, we'll eventually have our entire business on one system, which will be wonderful from an efficiency and information-sharing perspective. Sean Williams: Okay, thanks a lot for the update, and congratulations on the quarter. Tim Tevens: Thank you. Greg Rustowicz: Thanks, Sean. Operator: Our next question comes from Gary Farber at CLK. Gary Farber: Yes, good morning Tim Tevens: Hi, Gary. Gary Farber: I have two questions. First, could you talk about what you're seeing from your competitors and markets as to why you think they're accelerating or are people raising prices and markets that are slowing. Any price dynamic going on there? And then, also discuss your trends in raw materials. Greg Rustowicz: The competitors are acting rationally, no one is doing anything crazy. It's kind of a normal recovery, as I would phrase it. Having lived through a couple of these, our competitors are doing what they would normally do, what we'd expect them to do, which is be competitive, raise prices, and in some cases follow our lead. In some cases, we follow their lead, depending on the product line. So, for all intents and purposes in the U.S., call it business as usual, given the strong recovery. In Europe, it's a little different in that the product lines that we sell there might be slightly different, a little less power hoist, a little more manual hoist or more rigging tools, and we think we've taken a little bit of share there, because most of Europe gets imports from China on these product lines and they've had incredible supply disruptions. We have had some, as well, but not as bad. We think, as we look to how we perform there compared to what the market has done, that we've actually taken a little bit of share in Europe. And given the growth in the Latin American countries, as well as the Asia-Pacific region, with strong competitors in all of those regions, some very local, some global competitors, they too are acting in the normal way. We just have such a smaller position that it's hard for us to get our arms around why we sometimes win or why we sometimes lose, but we're working hard at that. The good news is both are growing at a rapid pace. 8

9 Gary Farber: Great, okay, and then raw materials? Greg Rustowicz: I would say that we're in more of a moderating price environment there, for the most part. Steel does have a tendency to bounce around a bit, but it's not hugely up or hugely down. We buy a lot of motors, where we saw a huge spike in increase about a year ago, given the price of copper, but that seems to be moderating now, as well. So inbound materials seem to be not a huge drag; although, we are seeing some levels of inflation, especially in China, where labor is going up dramatically. Energy costs are also up dramatically, but we're seeing that the whole market is pricing along with those cost increases, as well. In Latin America, Mexico is not seeing increases. The volume is about flat there right now, given the U.S. hasn't really recovered as much to affect Mexico just yet. And Brazil is business as usual in terms of supply chain, as well. We're not seeing any huge spikes there just yet either. Gary Farber: One last question on your customer base, as a service comes out, say month to month. Sometimes you feel confident, sometimes you're not confident. Is there anything anecdotal to pass along with what you're hearing from your customers by geography? Tim Tevens: It's positive around the globe, with a lot more caution in Europe as you might imagine. We're seeing growth, but it's a lot slower growth, so we're cautious and it seems like everybody else is cautious too, not knowing where this whole sovereign debt debacle is going to end up just yet. That's probably the most cautious part of the world. China is growing at 8% instead of 9%, but it's still incredible growth. We're seeing good growth in Latin America, as well. The U.S. seems to be the one that, in the last couple of quarters, has really accelerated in terms of demand and our channel partners' demand of us to supply them. We are also seeing some heavy OEM guys, like Deere and Cat, invest incredibly heavily around the world, which we're pleased with, as you well might imagine, given our ability to participate with that too. Gary Farber: Right. Okay, thanks. Tim Tevens: Thank you. Operator: Our next question comes from Joe Mondillo from Sidoti & Company. Joe Mondillo: Good morning, guys. Greg Rustowicz: Good morning, Joe. Tim Tevens: Hi, Joe. Joe Mondillo: Just to jump on that last question. Your non-u.s. businesses seem to be obviously weaker when compared with your U.S. business in terms of growth. Are you surprised by that, given the GDP growth that we're seeing, stronger growth within Latin America and Asia? Also, in terms of that 4% growth in volume, is Europe the one region under that 4% or is there anywhere else that you're seeing weaker than that average 4%? 9

10 Greg Rustowicz: The bulk of our revenue outside the United States is indeed Europe, so if you look at the components of it, it s heavily weighted toward the slower growing environment. Our non-u.s. sales have expanded, much more heavily weighted in Europe, which has slower growth than Latin America or Asia-Pacific, which are smaller components but growing much more rapidly. It feels about right to me in terms of what you'd expect. Joe Mondillo: Are you seeing negative volume in some places in Europe? If the average is 4% volume and you're seeing pretty good growth elsewhere, are you seeing any negative contraction in volume anywhere in Europe? Greg Rustowicz: Keep in mind that the bulk of our European business is Germanic based, the northern part of Europe, which is still growing very nicely. UK is up, France is flat, Spain is down, and we don't do much in Greece. Italy is very small for us today, but that's still reasonably small growth, but still growth. I would think that Spain would be the primary contractor. Poland is up, the Eastern block of Europe, Hungary and Russia, are up, but we have a small presence there, so it's hard to say whether that's economic or whether that's us just doing a better job in an area we've been investing in. The only one I can point to as being negative is Spain, and it's a small component of our total European business. The German piece is very good, very positive, but as you might know 30% or 40% goes out of the country in terms of exports and they export around the world. Joe Mondillo: So you say that Europe, Middle East and Africa make up about a third of your business? Greg Rustowicz: Yes, exactly. Tim Tevens: You're right. Joe Mondillo:Of that third, Europe makes up how much? Tim Tevens: The bulk of it. Joe Mondillo: Thirty percent? Greg Rustowicz: Thirty out of the 33. I'm pulling that off the top of my head, but it feels about right. Joe Mondillo: What kind of growth are you seeing in your Latin America presence? Are you seeing high single digit or double digits? Greg Rustowicz: Double digit growth. Joe Mondillo: In terms of pricing, any changes in pricing anywhere in the world or how's that looking? Tim Tevens: As you know, we typically put price increases through annually and when things get really hot, maybe even more than annually, but we had a normal price increase. It seems to be rolling through around the world. We seem to be achieving what we targeted, so really nothing out of the ordinary around price. Joe Mondillo: So you usually increase pricing or change pricing in your June quarter? 10

11 Tim Tevens: It's usually in the month of April. Greg Rustowicz: The negotiations have already begun for the beginning of this coming fiscal year. Joe Mondillo: One of your primary international expansion goals was in China. Given the slowing growth that we're hearing about over there, has that tempered or changed your thinking and if not, where are we within that goal? Tim Tevens: We're probably halfway up the investment curve, ball park. It has not tempered our point of view. We do think that the industrial portion of China; the mines, power plants, general manufacturing, are going to continue to grow robustly. It certainly has slowed economically, but that's not from our perspective, because we're so new to the market. We just started investing two years ago. We're up to more than 30 salesmen and about a dozen engineers. We have eight offices scattered across the country and are really making a presence. That investment is making a difference for us there, in terms of seeing additional sales, setting up distribution, making contacts with OEM users/end users, and doing training on our products, so we still feel very good about it. There s plenty of room to grow in that market. Joe Mondillo: On an absolute basis, where are we in terms of how much sales are coming from China at this point? Tim Tevens: Three percent of our total revenue is in that area. The growth rates have been very high, but it's coming off small bases. From a cash flow perspective, in essence we're at the breakeven level within the region, despite adding these investments, because the sales are growing at such a rapid pace. Joe Mondillo: Given your investment timeline, where do you think this could be as a percentage of your whole business within a year or two? Tim Tevens: It will still be relatively modest. I would expect the same growth rates to occur there as we continue to invest, so you could see these high growth rates out of this small 3% base over the next year or two. Long term, which is our vision strategically, this part of the world should be 15-20% of our total revenue, as we look down the road much further than 1 to 2 years. Joe Mondillo: Lastly, given the concern and ominous feeling of the economy. What sort of contingency plans do you have on a just in case scenario? Tim Tevens: First on our list is EMEA. For the European piece, we have downside scenario planning underway that says, if it drops 5%, we would execute X in terms of cost control. And if it drops 10% et cetera, we have different models that point us towards what actions we would take. We would have to see a contraction for us to do that, so we know when to pull the trigger, so to speak, to implement that. It would be painful if we do it too soon and disrupt our channel partners and our end-user customers with the flow of product for any reason. That will be first. We do have other scenario plans around the world, but in the emerging markets, they're not done as robustly. Only because of the investments that we're looking at there, it's much more strategic an investment. In the U.S., it's fairly complete, as well, in terms of any kind of downturn, but that's not what we're anticipating or seeing, as you might imagine. 11

12 Joe Mondillo: I'm just wondering, just in case. You said you implemented some sort of downsizing in Europe, or did I hear you wrong? Tim Tevens: No, not yet. We have to be careful about when we pull the trigger, because the demand is still growing. We still have customers to serve and people who need our products. We really don't want to pull the trigger until we see our business start to contract and go negative. Greg Rustowicz: What Tim mentioned was that we have contingency plans in place. Joe Mondillo: All right, I think that's all I have. Thanks a lot. Tim Tevens: Thanks Joe. Operator: To ask a question, press star, 1. Our next question comes from Matthew Dodson at Edmund White Partners. Matthew Dodson: A quick question, Is the pickup in demand in the U.S. going to fully offset any weakness you might be seeing in Europe? Tim Tevens: I would certainly think so. We actually saw Europe recover much more quickly than the U.S. about a year and a half ago. Europe came out of the block's gamebusters for us, predominantly driven by Germany. The U.S. was somewhat reticent, somewhat delayed, in their recovery until just this year. Now, we're seeing the U.S. being robust and Europe being slow, but still 53% of our revenue comes from the United States and only 30% comes from Europe. I would expect that it would more than offset any downturn. Greg Rustowicz: But we are growing in Europe. It's slowing growth, but there is still growth. The U.S. is obviously growing much stronger as the U.S. economy gets stronger. Matthew Dodson: With your forging business coming back so nicely, is there any reason why we wouldn't see operating margins get to the low end of your target next year? Greg Rustowicz: We're in the process of putting our budgets together for next year, so it's fairly early to say. Tim Tevens: It's not clear just yet, but to your point, we do target 12% to 14% operating margins, when we have a revenue base that's consistently in the well-above $600 million, but in the low $600 million and the forging business does recover, we would expect that to happen sometime in the next year or two, I would guess. Greg Rustowicz: The two key points to get to that 12% - 14% are additional volume and the operating leverage on that volume and continuing to improve in Chattanooga. Doing those two things is going to get us back to 12% to 14% margin, with volume being the primary one. Matthew Dodson: Right. Thank you. Operator: At this time, I have no questions in queue. 12

13 Tim Tevens: Thank you, Sherry, and thanks everyone for your time today. Just to summarize for you, we all believe that, as a company, we're well positioned to continue to execute our strategic plan to profitably grow our business. Our operating leverage is improving nicely, at 54% this quarter, and we have $82 million in cash to help us execute our growth plan. We also continue to make strategic investments in emerging markets, such as China and Brazil, and invest in new products and services, as well. To demonstrate that execution of the plan, we did acquire the Yale South Africa business that we mentioned to you. While it s may be small, it s very strategic in terms of leveraging our knowledge in the region, as well as in the mines. I would also want to thank all of our associates around the world for their help and dedication in executing this quarter very, very nicely and for making our company a stronger, well-positioned organization to continue that growth. As always, we appreciate your time today. Thank you and have a good day. Operator: This concludes today's conference. Thank you for participating. You may disconnect at this time. END 13